How Amazon's Wooing Of Chinese Sellers Is Killing Small American Businesses

E-commerce is now global. The geographic boundaries separating the spheres of marketplaces like Amazon, Taobao, TMall, and JD, have dissolved very rapidly, and now merchants in the U.S. have direct access to customers in places like China, and Chinese merchants have direct access to customers in the U.S., etc. While the internationalization of e-commerce seems like the appropriate next phase of globalization -- a movement that sought to remove borders and cut out unneeded middlemen from the global supply and sales chain -- putting online venders into one big global pool of competition has produced some marked conflicts when fair practices and IP compliance are not equally adhered to.

When Amazon began pushing for more Chinese merchants to start selling on their U.S. and European marketplaces in 2015 they greased the pathways for manufactures in the “world’s factory” to sell directly to end consumers in the West, but they also cleared the way for the counterfeiters and scammers that have long plagued Chinese e-commerce sites to not only rip off the intellectual property of Western brands but to compete directly against them in the same marketplace, often on the same pages. While counterfeit items were traditionally relegated to the commercial backstreets — under-regulated developing countries or underground markets — they are now being sold on the internet’s proverbial high streets, side-by-side genuine products from the likes of Apple, Birkenstock, and Michael Kors. According to a recent report by the OECD, over 60% of the world’s counterfeits originate from China, and 40% of the country’s domestic online marketplaces are made up of counterfeit goods.

(Bartek Sadowski/Bloomberg)

In 2014 Matthew Snow had an idea for a business: he would put his artistic skills to use and develop a line of apparel that would feature his unique graphic designs. He called his brand Boredwalk, and it mostly focused on creating t-shirts that had an array of humorous designs and timely social commentary emblazoned upon them. Starting out selling on Etsy.com, his business quickly turned into a full-time job as he hired a complete full time staff and moved production to a warehouse in LA, where he is based.

Less than a year later Snow was contacted by an Amazon recruiter who noticed that his shirts were selling well. He was formally invited into the Amazon marketplace, and he capitalized on the offer. After going through an extensive vetting process, which included formally registering his brand, providing documentation about their production and fulfillment processes, as well as proof of their facility’s geographic location, he was finally ready to begin selling. As he was the original creator of his products rather than a reseller, listing them for sale also wasn’t as easy as clicking checkboxes of items that are already being sold, and he went through the laborious process of building thousands of product listings up from scratch, creating and publishing all the relevant product photos and writing all of the descriptions.

Amazon was initially a move that paid off for Snow. “The volume was definitely robust enough for it to be quite profitable,” he said. By the end of 2015, Amazon accounted for 40% of Boredwalk’s gross online sales. Snow then began scaling up operations — hiring more staff and investing in additional equipment — in anticipation for a big 2016 holiday season. Unfortunately, that didn’t happen.

Throughout the beginning of 2016, Snow noticed his sales on Amazon leveling off, and by the midpoint of the year they were plummeting. He was confused by this, as he kept adding more products which usually resulted in a boost in sales but now did little to arrest the slide. He began actively looking into the issue and one day decided to do a search for one of his products as a user would. He quickly discovered what was going on:

His t-shirt designs had been copied by other merchants who were selling them for lower prices.

It was clear to Snow that these were not other retailers who had legitimately obtained his shirts via wholesale or other means and were merely outcompeting him, but were counterfeiters who had stolen his designs and were undercutting him by selling on the same pages that he painstakingly made. From the viewpoint of the user, these counterfeit shirts appeared to be original, as they were being sold on Boredwalk's official Amazon listings. The only difference that the customer could see was that they were being sold for a few dollars cheaper.

While Amazon’s system of listing like items on the same pages keeps the marketplace organized and inhibits duplicate listings, it creates a situation for the buyer where it becomes very difficult to know if the product they purchase is going to be authentic or not.

“You can't know based on a listing whether or not it's a generic or a brand, you only know from opening it and using it,” said Chris McCabe, an Amazon Seller consultant from ecommerceChris and a former Amazonian who once worked in the company’s merchant account investigation division.

Snow then spent the following days surveying the extent of the damage: 1,500 of his products had been counterfeited by 15 to 20 different sellers — all of whom where based in China or Hong Kong.

Snow was not alone in having his products ripped off on Amazon. Multitudes of other cases have been documented in the mainstream media and literally hundreds more can be found on Amazon’s seller forums. Innovative brands such as TRX Training System, and Forearm Forklift have been much touted examples of American businesses that were severely adversely impacted by counterfeiters on Amazon — which prompted the e-commerce giant to file a highly publicized lawsuit on behalf of them.

An interesting trend is that many of the companies who are having their products counterfeited on Amazon are not just the big brands like Apple, Michael Kors, and Mercedes Benz, but also smaller, "mom and pop" brands like Snow’s — grassroots entrepreneurs who design and develop creative or innovative products that the market responds to positively. But due to the lack of effective regulation within the Amazon marketplace, these entrepreneurs are often not adequately rewarded for their efforts for very long. Instead, copycats with access to very nimble manufacturing capabilities are able to rapidly duplicate the products and put them right out on the Amazon marketplace, eventually displacing the sales volume of the originals.

“These [Chinese] sellers are very proficient at identifying hot-selling items on the Amazon platform and then copying them and selling them as the real thing, which is why they are very problematic sellers,” Julie Zerbo from Fashion Law explained. “Moreover, as we have seen with Chinese counterfeit sellers that utilize their own sites, they are very good at hiding their identities and making themselves untraceable in order to avoid legal ramification of their actions.”

In 2015, Amazon gave a big boost to Chinese merchants looking to sell directly to buyers in the USA, Canada, and Europe, by streamlining the shipping process by doing things like registering with the Federal Maritime Commission to provide ocean freight, which allowed for the cheap and efficient shipping of entire containers from places like China to Amazon’s fulfillment warehouses in the west. This, combined with a decades-old UN-directed arrangement to give massive discounts on international postage -- which often makes it cheaper to send a package from China to the USA than it is to send the same package domestically -- means that U.S.-based sellers are already at an inherent disadvantage against foreign competitors.

Once finding that his work had been ripped off by other sellers, Snow wasted no time getting in touch with Amazon to find a solution. He quickly submitted infringement reports for each counterfeited item in accordance with the Digital Millennium Copyright Act (DMCA), but then found himself entrenched in the quagmire of the company’s heavy reliance on automation and the ineffective HR strategies that we’ve previously covered on Forbes.com. Snow was exasperated to find that his legitimate listings were being purged and his own company was being penalized on Amazon due to his complaints, as if he was counterfeiting himself. He once even received an email from Amazon instructing him to contact the rights owner for his own products, with the email address that he was told to contact being the exact same one that Amazon sent the notice to.

Amazon’s general protocol for dealing with sellers who claim that their items have been counterfeited is for the sellers themselves to buy the counterfeiter’s products to confirm their inauthenticity. Once this is done, the legitimate seller must then send both the offending item and the original to Amazon. This “test buy” process can be both time consuming and expensive for legitimate sellers. Snow estimated that it would have cost him nearly $40,000 to buy samples of all the counterfeits of his 1,500 products and then send them to Amazon with the originals — a massive amount of money for a small business. In the end, Snow realized that this would not only be an expensive and laborious process, but futile as well.

“Even if we were willing go through all of that, it would be pointless,” he lamented. “All it would do is remove that particular batch of seller accounts from our product pages. Those same Chinese sellers can create brand new accounts immediately and go right back to hijacking our product pages.”

This positioned was backed up by Zerbo:

“Amazon has long had a report/removal option as part of its site but the onus is on brand owners, as the trademark holders, to do the reporting, and given the truly huge number of listings on Amazon that can prove to be a tedious endeavor for brand owners. Moreover, even if they partake in the reporting/removal process and allegedly infringing items/accounts are removed, new ones will inevitably pop up shortly thereafter.”

When a brand owner has their products counterfeited on Amazon it is not just a matter of losing revenue, but is also a matter of sacrificing their brand’s reputation. It goes without saying that counterfeit items are usually not as high quality as the originals, and it is very common for customers receiving counterfeit items on Amazon to not even realize it — they ordered the item from an official listing, why would they assume they received a fake? Instead, many simply conclude that the product they ordered was of inferior quality, and they often leave negative feedback sharing this with other potential customers, which ultimately penalizes the legitimate brand for something that they have absolutely nothing to do with.

Shortly after agreeing to sell the plate at Walmart, the Flecks began offering Makin Bacon on Amazon through a third-party seller who took care of getting the plates from the factory to Amazon’s warehouses. Customer satisfaction stayed strong. Makin Bacon’s Amazon ratings were consistently in the high 90s, says Abbey. Then last fall, its Amazon score started to slip and the Flecks got a disconcerting email from an unhappy customer. “They said our dish melted, but we knew that was impossible,” says Abbey. By Christmas, the email complaints about plates melting in microwaves had turned into “a barrage,” she says, as Makin Bacon’s Amazon rating plunged into the 60s and sales started to dry up.

According to the Flecks and to Jeff Rosenfeld, a lawyer they hired in January, Makin Bacon is the victim of an attack by Chinese counterfeiters that the Flecks fear will wipe out their business. In addition to decimating their Amazon sales, which quickly fell by 50%, the Flecks say the fake plates are hurting them at Walmart because customers who buy melting plates on Amazon think Walmart is carrying the same defective product.

The damage that counterfeit sellers on Amazon has wrought upon otherwise respected brands have caused some, like Birkenstock, to exit the Amazon marketplace entirely.

And in June of 2016 Boredwalk did just that: they pulled all of their products from Amazon and petitioned to have their listings deleted.

“Between the precipitous decline in sales and the proliferation of negative feedback tied to our product pages on Amazon — consumers were placing orders on our hijacked product pages, receiving low quality counterfeits that did not match our item descriptions, and they were not pleased — we couldn’t stand the thought of our brand’s reputation being damaged further,” Snow said.

While providing an open, streamlined, and fast marketplace for sellers to get their products to market and cut out the middlemen, Amazon also opens the door for masses of counterfeiters and scammers to exploit the system at the expense of legitimate brands and customers alike. On the one hand, Amazon is an extremely innovative, boundary-pushing company that has given life to tens of thousands of small businesses around the world while providing customers with a diverse marketplace unlike anything else in history. On the other hand, Amazon relies on strategies which push employees so hard that they often resort to doing slack work in order to meet their extremely demanding quotas along with automation processes that often miss the mark.

“Generally speaking, there is a glaring failure among consumers and legislators in the U.S. to recognize that our intellectual property is one of our most valuable exports — think about all of the jobs created by entities like Disney, the NFL, MLB, Marvel & DC, etc. related to merchandising,” Snow proclaimed. “Turning a blind eye to this stuff is setting us up for a big fall down the road, and sooner rather than later.”

While e-commerce has gone global, legal regimes simply have not, enabling counterfeiters to sit protected behind the very same borders that they can now freely sell across.

I'm the author of Ghost Cities of China and have been traveling perpetually since 1999 -- through 88+ countries. I can often be found in some new city or somewhere along the New Silk Road.

I'm a perpetually traveling writer who focuses on new cities (ghost cities), the New Silk Road, and international e-commerce as seen from the ground. I am the author of "Ghost Cities of China: The Story of Cities Without People in the World's Most Populated Country," a book...